Project Practitioners > What does a war in Ukraine, and Chinese government policies, have to do with project success in the luxury goods business? Plenty!

What does a war in Ukraine, and Chinese government policies, have to do with project success in the luxury goods business? Plenty!

By J LeRoy Ward

Gucci-LogoA recent New York Times article described how geopolitical events have impacted sales in the luxury goods market. Falling revenues at Gucci, one of the oldest and most famous designers in the world, has forced the ouster of two of its top executives: Frida Giannini, Gucci’s creative director, and Patrizio di Marco, it’s CEO. So, what really happened?

Conceptualizing, designing, and producing a luxury good is a project, and more specifically, a new product development project. For years no one was better at developing and selling the type of luxury products than this famed Italian designer. But times have been changing, and changing rapidly. In addition to “dizzying changes in consumer tastes and increasing competition from smaller brands,” Gucci sales have suffered due to two geopolitical events. 

Let’s turn first to China. The rising wealth in China has caused a boom in luxury goods purchases in the past five years. Just walk down any main street in the trendy shopping areas of Beijing and Shanghai (I’ve done both) and you will see all the same stores that line 5th Ave in New York, Orchard Road in Singapore, and other world-famous shopping meccas around the world. However, a recent crackdown on conspicuous consumption among government officials “has been felt at the cash registers at numerous fashion brands.”  

The article furhter highlights that “Europe’s prolonged economic crisis, along with recent Western sanctions against Russia, which have sharply reduced luxury spending by wealthy Russian tourists, have deepened the malaise.”  (How wealthy are these particular Russians? Well, in 2012, a record was reached when Dmitriy Rybolovlev, paid a record $88 million for an apartment at 15 Central Park West for his 22-year old daughter, Ekaterina!)

Could the project and product managers at Gucci ever have anticipated that Chinese officials would begin a campaign to discourage its citizens from conspicuous consumption, or that Russia would invade Ukraine resulting in Western sanctions that would affect sales of its products? The answer is YES, they certainly could have anticipated these events if only they had a better risk management process in place.

Gucci is a global company with a physical presence in many cities worldwide. These stores, I assume, are managed by smart folks who read the newspaper and watch TV. Why was it that they apparently didn't  put 2 and 2 together, or "connect the dots," and figure out what could have been the result of these two governmental actions? Also, I’m sure Gucci has a global and regional management structure overseen by even more experienced folks than their store managers. With smart, experienced professionals at the helm one would have to ask why they didn't see how these events could affect their sales? 

Well, as we know, even smart people often overlook some of the most important matters as it relates to project risk. Companies for years have hired global risk experts to help them estimate project risk. I just searched Google for “global risk services.” Here’s what one firm provides: 

How do you quantify investment and project risk?

This service provides transparent risk scores across 151 countries for 54 risk factors and 12 investment types. The risk factors, all of which are assigned a probability, include direct risks to cashflow, such as an increase in the capital gains tax, as well as broader risk events, such as a military coup (emphasis added).

In today's world everything seems to be connected even if it doesn't appear that way at first glance. What we see in this case is an example of nonlinear dynamics. Seems like Gucci would have been advised to hire a global risk services firm if it doesn't have the expertise in house to help understand how extraordinary global events can affect sales at the cash register.

My guess is they have really smart, creative peoplel running the company, but their time is probably better spent designing the next $10,000 handbag rather than doing global risk management. But hey, as this situation demonstrates, someone has to do it!






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